Unsure whether or overpay or save

RLH33

My IFA certainly earned his money when he got me a life of the mortgage deal with Woolwich at 0.39% above the base rate. Currently that means I am paying 0.89% on a £60k mortgage and it has 20 years to run.

We have been overpaying to the tune of £500 per month meaning that if we carry on that way we will be mortgage free in 5.5-6 years. Obviously interest rates are likely to go up in the next couple of years but I think we should be able to keep pace with them to ensure that the mortgage is still paid off on time.

My slight dilemma is whether to continue paying off the mortgage or whether to save the money instead. From a small amount of research it appears that a Lloyds TSB 5% regular savings account would be the best place for the £500 per overpayment (1 account each for oh and me) if I were to go down this route.

In the background is the thought that we will probably look to move in about 5 years time to a larger house meaning we will have to get another mortgage. The existing deal is portable and would still have 15 years to run at that time.

I would appreciate anyone's thoughts on whether it is better to save the money in an account and use that money plus my existing mortgage deal (plus another new mortgage) for when I move or is it just better to pay off the mortgage and just get a new one should we move, probably at a much higher rate of interest?

blueberrypie

With your mortgage interest rate at 0.89%, you'd be mad to overpay. You can put that money elsewhere and get a far better rate on it.

Think of it this way: if you have £100 to spare and you put it on your mortgage, after a year you've saved 0.89% of £100 (i.e. 89 pence), and your mortgage balance is £100.89 less than it would have been if you hadn't overpaid. But if you put your £100 into a savings account paying 3% net, you'll have made £3 in interest - and after a year you can put *that* (plus your £100) towards your mortgage - now your mortgage balance is £103 less than it would have been. You're better off by £2.11 - scale that up to overpaying by hundreds every month and you can see how it adds up.

So that leaves the question of where to put the money. First Direct has this week put its Regular Saver rate up to 8%, which is better than the LTSB rate. The FD one allows up to £300/month to be paid in. So (assuming you fit FD's criteria) you could open one FD Regular Saver and put the £300/month in that, and put the other £200/month into a LTSB Regular Saver.

If either you or your wife is a non-taxpayer, put the savings in that person's name and register for gross interest.

Using *any* Regular Saver is, of course, working on the assumption that the base rate doesn't rise massively in the next year - but with such a low tracker, that's not something you need to worry about (and even if the base rate did rise, you could always withdraw the money from the Reg Saver - you'd just lose the interest).

You don't need to save the money "for when you move" though - you can save it for a year and then put the total-plus-interest into your mortgage, or save it for a year and then put the lump sum into an ordinary savings account or investment, possibly drip-feeding it into another Regular Saver for the following year, etc. It's not a choice between "overpay now" and "save until we move" - it's a decision about when is the best time to shift the funds from savings accounts to your mortgage. When it comes to moving in a few years, it doesn't really matter *how* you've reduced your mortgage balance - it just matters that it's reduced.

Whether you'll be able to take your current mortgage deal with you if/when you move will depend on whether you and the property still fit the lender's criteria - porting is always subject to that. Nobody can tell you whether that will be the case, but owing less isn't ever going to make it more difficult. For the moment, you just want to make your extra money work as hard as it can for you so that you owe as little as possible when moving time comes.

RLH33

Thanks ever so much for your advice, that is exactly what I wanted to know really. I think I will now go and open the necessary savings accounts and start diverting the money to them rather than the mortgage.

Thanks again.

Spiggle

Hi RLH33,

Blueberrypie is brill at the sums and I would agree with the basic concept. The only thing I would say is that do make sure you are the type of person/people that will keep those savings for what you intended i.e. paying off the mortgage.

I didn't have an IFA but got the Woolwich deal at 0.19% above BoE so am paying 0.69% and throwing a large amount at the mortgage every month. I went through all the calculations and without doubt I would be better off saving it but unfortunately me and the OH are not strict enough with ourselves and would end up finding something 'necessary' to spend such large amounts of money on. So for us OP is the best way.

Oh, we have no intention of moving either.

I only say this because the sums are absolutely correct as blueberrypie has laid them out but it's important to remember the human element and be sure you can be strict with yourself.

Good luck with your saving.

All the best,
Spigs